Why VIX Futures Got Slammed

Mark Sebastian

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

Volatility had a soft day on Monday.

With the weekend effect taken into account, I have the real movement in the VIX down about 0.70.

Volatility futures, though, got SLAMMED.

Take a look at the across-the-board drop in the futures curve from Friday to Monday:

Front month futures dropped 0.75 in November and 0.80 in December …

A nice plastering of volatility.

This is why iPath Series B S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) and ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) were down so hard.

However, it is not over yet …

With the VIX at 15.25, and the front month future at 18.45, we still have massive contango in the front month and second month.

If VIX falls much further, or even just sits, we could see the November future below 17.5 by Friday.

What does this mean?

Puts in VIX are going to have an easier time than calls (then again, they almost always do).

UVXY could drop below 15 by Friday, and VXX could be below 20.

If you do want to hedge, the VIX Nov 19-24 call spread is cheap.

Your Only Option,

Mark Sebastian

VIX Edge

Mark Sebastian

Mark Sebastian is a former member of both the Chicago Board Options Exchange (CBOE) and the American Stock Exchange (AMEX), where he spent years mastering the art of options trading in the most competitive environment imaginable. As Chief Investment Officer at the hedge fund Karman Line Capital, Mark manages sophisticated options strategies for institutional clients. He is the author of two highly regarded books on options trading: ‘The Option Traders Hedge Fund’ and ‘Trading Options for Edge.’ Mark is a frequent guest on major financial networks including CNBC, Fox Business News, Bloomberg, and First Business News, where he provides expert commentary on market volatility and options strategies.

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